Pryse v Clark

Case •

[2017] NSWSC 185

•

01 March 2017

No judgment structure available for this case.

Supreme Court


New South Wales

  • Amendment notes
Medium Neutral Citation: Pryse v Clark [2017] NSWSC 185
Hearing dates: 27/02/2017, 28/02/2017
Date of orders: 01 March 2017
Decision date: 01 March 2017
Jurisdiction:Equity - Commercial List
Before: McDougall J
Decision:

Grant interlocutory injunctions to enforce clauses 13.3 to 13.6 of the partnership agreement between the plaintiffs and the defendants.

Catchwords: RESTRAINT OF TRADE – partnership agreement – application for interlocutory injunction – validity of restraint of trade – whether enforcement of restraint necessary to protect legitimate interests of partnership’s confidential information, good will or workforce stability – balance of convenience – adequacy of damages as a remedy for any breach – whether parties capable of assessing their best interests at the time of contracting – strength of plaintiffs’ case
Legislation Cited: Restraints of Trade Act 1976 (NSW)
Cases Cited: Amoco Australia Pty Ltd v Rocca Bros Motor Ltd (1973) 133 CLR 288
Australian Broadcasting Corporation v O’Neill (2006) 227 CLR 57
Cactus Imaging Pty Ltd v Peters (2006) 71 NSWLR 9
Cayne v Global Natural Resources PLC [1984] 1 All ER 225
Emeco International Pty Ltd v O’Shea (No 2) (2012) 225 IR 423
Engineering Co Pty Ltd (1973) 133 CLR 288
IRC v Muller & Company’s Margarine Ltd [1901] AC 217
Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd [1966] AC 269
Geraghty v Minter (1979) 142 CLR 177
Kolback Securities Ltd v Epoch Mining NL (1987) 8 NSWLR 533
Koops Martin v Deane Reeves [2006] NSWSC 449
Lindner v Murdoch’s Garage (1950) 83 CLR 628
Stacks Taree v Marshall (No 2) [2010] NSWSC 77
Woolworths Limited v Olson [2004] NSWCA 372
Category:Procedural and other rulings
Parties: Michael Keith Hamilton Pryse (First Plaintiff) and 165 others
Andrew Simon Clark (First Defendant) and 7 others
Representation:

Counsel:
P J Brereton SC / R J Harris / J E Curtin (Plaintiffs)
B W Walker SC / J Darams / Y Shariff / V Bulut (Defendants)

  Solicitors:
Herbert Smith Freehills (Plaintiffs)
Seyfarth Shaw (Defendants)
File Number(s): 2017/12052

Judgment   

  1. HIS HONOUR:   The first 165 plaintiffs are, and up until yesterday the defendants were, partners in the Australian law firm known as Herbert Smith Freehills (HSF Australia). The 166th plaintiff Herbert Smith Freehills Global LLP (HSF Global) is a limited liability partnership incorporated under the laws of England and Wales. The plaintiffs are, and again up until yesterday the defendants were, members of HSF Global.

  2. On 1 September 2016, the defendants gave six months’ notice of their intention to retire from both partnerships. That notice expired yesterday. It is common ground that, unless restrained, the defendants will become partners in an Australian law firm known as White & Case, and practise under that name.

  3. The plaintiffs seek interlocutory injunctive relief, restraining the defendants from joining or working for White & Case, and otherwise from breaching (so the plaintiffs say) the terms of restrictive covenants in the HSF Australia partnership agreement and the HSF Global partnership agreement. Their application was heard on 27 and 28 February 2017. For the reason just indicated, it requires prompt decision.

  4. The material provided for the court’s consideration comprised some two lever arch folders of affidavits, seven lever arch folders of exhibits, three separate exhibits, and two lever arch folders containing the authorities to which one party or the other had referred in written submissions. The written submissions were detailed, and the oral submissions were even more detailed. The issues raised are complex, and clearly of very significant importance to the parties.

  5. When I indicated to the parties that I would need some little time to consider the matter, the defendants very properly stated that they would comply with the restraints until I gave my decision. Whilst I am grateful for that, it once again emphasised the need for speed. In those circumstances, I decided to give oral reasons which, whilst they would not refer in any adequate way to the range and detail of the submissions, nonetheless (I trust) would indicate the principal areas of dispute and my reasons for deciding as I shall do.

Limitation of the matters in dispute

  1. The defendants offer undertakings to the court which, in substance, tender compliance with some of the restraints. They say that the further restraints, in terms of which the plaintiffs press for injunctive relief, are void, as being against public policy, because they go further than is necessary to protect the legitimate interests of the plaintiffs.

  2. In relation to the undertakings that the defendants do offer, there are some relatively minor differences in drafting between the terms of those undertakings and the terms of the restraints to which they are referable. Whilst I am not sure that the differences are of great significance, I think that the better and safer course is for the restraints, to the extent that they are not in substance disputed, to operate according to their contractual terms. It follows that, for those otherwise non-contentious restraints, I propose to grant injunctions as sought by the plaintiffs, rather than accept the substantially but not identically worded undertakings of the defendants.

  3. As to the restraints that are in dispute, I conclude, for the reasons that follow, that the plaintiffs have made good some, but not the whole of, their claims for interlocutory injunctive relief. In terms of the relevant restraints (see at [25] below), the plaintiffs should have orders in terms of cls 13.3 to 13.6 (all three paragraphs of the latter), but not otherwise.

Background

  1. HSF Australia came into existence when on 1 October 2012 the Australian legal practice then known as Freehills effectively merged with the United Kingdom legal practice known as Herbert Smith. For convenience, and in the hope that the technical inaccuracy is irrelevant, I shall use the expression “HSF Australia” to denote not only the Australian partnership as it exists at present (and has existed and been constituted from time to time since the merger), but also the antecedent firms known, at different times, as Freehills or as Freehill Hollingdale and Page.

  2. The partnership agreement for HSF Australia is found in a document known as the Partnership Record. The first relevant Partnership Record came into existence, with the merger, on 1 October 2012. It has been varied and restated on several occasions since then. In the course of submissions, counsel for the parties referred consistently to the current version, which came into effect on 6 April 2016. It was common ground that there is no relevant difference between that version and any relevant earlier version. Accordingly, I shall adopt that usage.

  3. The affairs of HSF Global are regulated by an agreement known as the Herbert Smith Freehills Global LLP Members Agreement (the HSF Global Agreement). The parties to that agreement include the plaintiffs and (up until yesterday) the defendants. There are other parties, but they are of no present significance.

  4. The restraints on which the plaintiffs rely are found in cl 13 of the Partnership Record and in cl 20 of the HSF Global Agreement. There is no relevant distinction between those restraints (except, of course, that those entitled to enforce the restraints under the Partnership Record are the first 166 plaintiffs, and HSF Global is the party entitled to enforce the restraints under the HSF Global Agreement). Thus, again, I shall in general refer only to the form of the restraints as they appear from cl 13 of the Partnership Record.

  5. HSF Australia is a very large law practice. As a result of the merger between Freehills and Herbert Smith, the Australian partnership and the global partnership offer a full range of commercial legal services in Australia, the Asia-Pacific Region, and around the world.

  6. One of the areas of specialty in HSF Australia’s practice, and the particular area in which the defendants worked, is known as the Finance, Real Estate and Projects (FREP) practice group. That practice group specialises in the financing and project delivery of major infrastructure and other projects. It has subdivisions including project finance, major projects and infrastructure, and environment and planning. Until yesterday, the defendants worked in one or other of those subdivisions.

  7. White & Case is an arm of an international law firm (or conglomerate) that describes itself as “the leading law firm in project finance globally”. HSF Australia and HSF Global consider White & Case to be a major competitor in Australia and globally, including for FREP work.

  8. White & Case has opened an office in Melbourne, and is expected to open an office in Sydney in the near future. There can be little doubt that, from those offices, White & Case will seek to compete with Australian law firms, including HSF Australia, in at least the area of project finance. In short, White & Case will compete in Australia with HSF Australia’s FREP practice group.

Relevant terms of the Partnership Record

  1. Clause 3.1 states the business of the partnership. It need not be set out.

  2. Clause 6 deals with admission of partners and changes in their status as partners. It need not be set out, although it may be noted that the clause makes a distinction between “Partner up to the Review Point” and “Partner beyond the Review Point”. The difference in substance concerns the entitlement to share in profits (and the requirement to bear losses), which is the subject of cl 7.1. Clause 7.1 need not be set out.

  3. Clause 9.1 imposes obligations on partners, including (as one would expect) obligations of good faith and diligence. Clause 10.1 sets out more specific obligations. Mr Brereton of Senior Counsel, who appeared with Mr Harris and Ms Curtin of Counsel for the plaintiffs, referred specifically to cl 10.1(h). I set out that paragraph, although in doing so I note that there is no pleaded case of breach:

10.1   Specific obligations

Subject to clause 10

…

(h)   owe to the Partnership and the Firms the duties of good faith that would apply as between Partners if the Partners were partners in a partnership, and without prejudice to the generality of the foregoing shall not solicit, canvass, induce, encourage or facilitate another Partner or solicitor or other qualified lawyer to leave the Partnership or any of the Firms in a manner which may be co-ordinated with or otherwise linked with that Partner or where those persons may intend to work together in competition with the Partnership or any of the Firms;   

  1. Clause 11.1 specifies the circumstances in which a partner ceases to be a partner. Those circumstances include “voluntary retirement”, which is what the defendants did. That requires at least six months’ written notice, which the defendants gave. That notice was given on 1 September 2016, and expired yesterday.

  2. Although I have said that there is no pleaded case referable to cl 10.1(h), it may be a matter of some interest to note that seven of the eight defendants gave their notice of retirement within minutes of each other, and that the other defendant gave notice about half an hour later. It is difficult to avoid at least a suspicion that their departure was concerted.

  3. Clause 11.5 deals with “suspension and work direction”. I do not think that it has a great deal to do with the interlocutory application. However, since Mr Walker of Senior Counsel, who appeared with Mr Darams, Mr Shariff and Ms Bulut of Counsel for the defendants, referred to it in submissions, I set out cl 11.5(a),(b):

11.5 Suspension and work direction

(a)   If:

(1)   a Partner gives written notice of voluntary retirement under clause 11.1(a); or

(2)   a Partner is suspended from participating in the affairs and business of the Global LLP,

either the Board or the Chief Executive Officer may, in their absolute

discretion, suspend that Partner from participation in the affairs and

business of the Partnership upon terms and conditions which the

Board or the Chief Executive Officer considers, in their absolute

discretion, appropriate in the particular circumstances.

(b)   If a Partner is suspended under this clause 11.5, the Partner must act in accordance with the terms of his or her suspension and must not act in any way inconsistently with the terms of his or her suspension.

  1. Clause 12.8 deals with goodwill. Since it attracted some attention in submissions, I set it out:

12.8   No allowance for goodwill or other assets

It is a fundamental condition going to the essential nature of the Partnership and each Partners’ interest in the Partnership that upon the death, retirement or cessation of any Partner, no sum will be payable or taken into account for goodwill, other assets of the Partnership or otherwise in respect of a Partner’s retirement from the Partnership other than as may be provided in clause 12.1.

  1. Mr Walker referred also to cl 12.12, and I set it out:

12.12   Use of Partnership Property

On the death, retirement or cessation of a Partner:

(a)   the Former Partner will not be entitled to the use of any Partnership Property; and

(b)   the Continuing Partners will alone (subject to the conditions noted in part 14) be entitled to the use of all Partnership Property.

  1. As I have indicated, the relevant restraints under the Partnership Record are found in cl 13. Although some parts of that clause are of no great present relevance, the simplest course, including because it contains its own dictionary, is to set out the whole clause:

13   Protection of Partnership on cessation of Partners

13.1   Application of protections

An Outgoing Partner shall be subject to the provisions of this clause 13 except to the extent that the Board in its sole and absolute discretion may otherwise agree in writing with the Outgoing Partner.

Any relaxation or waiver of the provisions of this clause 13 in respect of an Outgoing Partner will not affect the operation or effect of this clause in respect of any other Outgoing Partner.

The restrictions and undertakings contained in this clause 13 shall not apply to anything done by any Outgoing Partner to the extent done professionally for himself or herself or for any member of his or her family.

The Board may certify whether any person is within any definition or category specified in this clause 13.

13.2   Interpretation

In this clause 13:

Term

Meaning

Advertisement

any form of advertisement including websites, email designs or wording, brochures, directory entries, stationery and press releases promoting a practice for the provision of legal services.

Client

a person who at any time during the Prior Period was a client of any of the Protected Entities, was in negotiations with any of the Protected Entities with a view to becoming a client, or was in the habit of dealing with any of the Protected Entities and, in any such case, with whom the Outgoing Partner had material dealings in the course of the performance of duties for any of the Protected Entities.

directly or indirectly

includes references to acting alone or jointly with, or as agent, consultant, partner, director, member or employee of, or otherwise on behalf of, any other person or through or by means of any other person.

Exempt Partner

a Partner who has become an Outgoing Partner as a result of ceasing to be Member of the Global LLP as a result of clause 19.2 (Notice to a Member) or 19.5 (Notice for illness or other incapacity) of the Global LLP Members’ Agreement.

Linked Partner

as regards an Outgoing Partner, means another Partner or Outgoing Partner or Former Partner whose Retirement Date falls within 366 days before or after the Retirement Date of such Outgoing Partner, and, in the opinion of the Board, whose departure from any of the Protected Entities has been co-ordinated with or otherwise linked with that of the Outgoing Partner, or, in the opinion of the Board, where the Outgoing Partner and the Linked Partner may intend to work together in competition with any of the Protected Entities.

person

includes any person, firm, limited liability partnership, company, body corporate, unincorporated association or other organisation or entity.

Prior Period

means, in relation to any Outgoing Partner, the period of 2 years preceding such Outgoing Partner's Retirement Date.

Protected Entities

the Partnership and the Firms.

Qualified Lawyer

an employee or consultant or ex-employee or ex-consultant of any of the Protected Entities who is either a solicitor or other qualified lawyer and with whom the Outgoing Partner worked or had material contact, or over whom the Outgoing Partner exercised control or responsibility, in the course of duties for any of the Protected Entities, during the Prior Period.

Relevant Offices

in relation to any Outgoing Partner, any office of the applicable Protected Entity in which he or she has been based in the Prior Period and, if the Outgoing Partner has been on secondment, the home office of that Outgoing Partner.

Rendering Services

in relation to any Outgoing Partner, rendering services or holding out as rendering services as a partner, employee, consultant or agent of an organisation providing, inter alia, legal services to clients (being persons other than the organisation concerned) of the same kind as, or of a nature similar to, any of those provided or offered by the Outgoing Partner on behalf of any of the Protected Entities or at any time during the Prior Period and doing so in competition with any of the Protected Entities and "Render Services" and "Rendered Services" shall be construed accordingly

Restricted Area

has the meaning from time to time ascribed to that term in the document accessible to Partners via the Global LLP intranet.

Restricted Period

in relation to any Outgoing Partner, the period of six months from the Partner’s Retirement Date and other than in respect of clause 13.6, reduced by any suspension the Outgoing Partner is required to serve under clause 11.5.

Specified Competitor

in relation to any Outgoing Partner, a significant competitor of any of the Protected Entities in respect of Rendered Services of the Outgoing Partner, as determined by the Board from time to time by reference to the practice or business area or Relevant Offices of the Outgoing Partner.

13.3   Influencing Allocation of Work by Client

An Outgoing Partner who is concerned, engaged or interested in, or carries on in any way, directly or indirectly, any business Rendering Services (such business and the person carrying it on being hereafter referred to as a "Business") shall not at any time during the Restricted Period directly or indirectly use his or her influence by reason of knowledge of the business of the Partnership or the Firms or of any Client to cause or endeavour to cause, or assist any third party to cause, any Client to transfer work undertaken by any of the Protected Entities at the Retirement Date to the Outgoing Partner or to a Business.

13.4   Rendering Services to Clients and Connected Entities

An Outgoing Partner who is concerned, engaged or interested in, or carries on in any way, directly or indirectly, a Business shall not, at any time during the Restricted Period directly or indirectly, Render Services (including sending any Advertisement) to:

(a)   any Client; or

(b)   any subsidiary undertaking or parent undertaking of a Client or subsidiary undertaking of any such parent undertaking which the Outgoing Partner knew had received or was to receive the benefit of his or her work for that Client.

13.5   Rendering Services to Clients with Linked Partners and Others

An Outgoing Partner who is concerned, engaged or interested in, or carries on in any way, directly or indirectly, any Business which includes (or is to include) any Linked Partner and/or Qualified Lawyer (together referred to in this clause 13 as "Third Parties") shall not, at any time during the Restricted Period directly or indirectly, Render Services to:

(a)   any Client by reference to either the Outgoing Partner or any of such Third Parties; or

(b)   any subsidiary undertaking or parent undertaking of a Client or subsidiary undertaking of any such parent undertaking falling within the terms of clause 13.5(a) which the Outgoing Partner knew had received or was to receive the benefit of the Outgoing Partner's or any of such Third Parties' work for that Client.

13.6   Soliciting Members and Qualified Lawyers

An Outgoing Partner shall not, at any time during the Restricted Period, directly or indirectly:

(a)   solicit, entice away or endeavour to entice away, or assist any third party to solicit, entice away or endeavour to entice away from any of the Protected Entities any person who was at the Retirement Date a Member or a Qualified Lawyer;

(b)   offer employment, consultancy, partnership or membership of a limited liability partnership to any such person; or

(c)   employ, engage as a consultant or enter into partnership or membership of a limited liability partnership with any such person.

13.7   Working in competition within Restricted Area

An Outgoing Partner other than an Exempt Partner or a Partner up to the Review Point shall not, at any time during the Restricted Period, directly or indirectly Render Services within the Restricted Area of the Relevant Offices of such Outgoing Partner.

13.8   Working in competition with a Linked Member

An Outgoing Partner other than an Exempt Partner shall not, at any time during the Restricted Period, directly or indirectly Render Services with, or in association with, a Linked Member or when concerned, engaged or interested in a Business with a Linked Member.

13.9   Working in competition for a Specified Competitor

An Outgoing Partner other than an Exempt Partner or a Partner up to the Review Point shall not, at any time, during the Restricted Period, directly or indirectly Render Services when concerned, engaged or interested in any business which is a Specified Competitor.

13.10   No use of name of the Protected Entities

An Outgoing Partner must not at any time after the Retirement Date practise or hold out directly or indirectly that the Outgoing Partner is practising as a solicitor or other lawyer or directly or indirectly render professional services of the same kind as, or of a nature similar to, those provided by any of the Protected Entities at the Retirement Date under any name the same as, similar to, or likely to be confused with, the name or style of any of the Protected Entities or by any other means represent that he or she is associated in any way with any of the Protected Entities.

13.11   Confidential Information

An Outgoing Partner shall at all times after the Retirement Date keep secret and confidential and not disclose or communicate to any person or use for any purpose any Confidential Information except insofar as such information is required to be disclosed by a court or by a Regulatory Authority or Revenue Authority of competent jurisdiction and shall in any such cases (i) promptly inform the Board of any disclosure so required and (ii) co-operate with the Board and take such steps as the Board may reasonably require in order to enable it to mitigate the effects of, or avoid the requirements for, any such disclosure. This clause 13.11 shall not prevent an Outgoing Partner using his or her skill or experience as a solicitor or other qualified lawyer.

13.12   Transfer of work and contacts

An Outgoing Partner shall use all reasonable endeavours to ensure that the Protected Entities retain the benefit of his or her practice and shall use all reasonable endeavours to ensure that all work carried on by the Outgoing Partner and all his or her contacts with clients and intermediaries at the Retirement Date including work which is of a personal nature and offered to the Outgoing Partner by virtue of that Outgoing Partner’s position as a Partner up to the Review Point or a Partner beyond the Review Point or partner of any of the Protected Entities (such as positions as a director, executor, trustee, administrator, receiver or insolvency practitioner) shall be assumed by other Partners nominated by the Board.

13.13   Determination of Specified Competitors and Restricted Areas

The Board may from time to time determine:

(a)   and inform Partners or relevant Partners of the Specified Competitors either generally or in respect of any practice or business area or location. The Specified Competitors of an Outgoing Partner for the purposes of clause 13.9 shall include the Specified Competitors applicable to the Outgoing Partner (of which the Outgoing Partner was so informed) on the earlier of the date of any notice given to or by him pursuant to clause 11.1(a) and his or her Retirement Date; and

(b)   the Restricted Area of any Partnership Premises and may make changes to the Restricted Area of any Relevant Office. The Board shall inform Partners of any such determination of Restricted Area or change of Restricted Area. The Restricted Area of any Relevant Office for the purposes of clause 13.7 shall, in respect of the Relevant Offices of the Outgoing Partner, be the Restricted Area of which the Outgoing Partner was so informed on the earlier of the date of any notice given to or by him or her pursuant to clause 11.1(a) and his or her Retirement Date.

13.14   Continuation of Restrictions

Without prejudice to the rights of a Successor Firm, the provisions of this clause 13 shall apply to each Partner (other than a Partner on becoming a member of or a partner in a Successor Firm) following the winding up of the Partnership or a transfer of the business of the Partnership, save that:

(a)   a reference to "Dissolution Date" or the date of such transfer shall replace each reference to "Retirement Date";

(b)   the restrictions referred to in clauses 13.3 to 13.17 shall cease on the Dissolution Date, or if there is a Successor Firm then, unless determined otherwise by the Board, such restrictions shall cease on the date they would have ceased if the Dissolution Date was the Retirement Date; and

(c)   if there is a Successor Firm, references in this clause 13 to Partners, Outgoing Partner or Former Partners of the Partnership shall be construed so as to include members, outgoing members or former members or partners, outgoing partners or former partners in the Successor Firm and references to the Board shall be construed, if the context so requires, to include the governing body of the Successor Firm.

13.15   Interpretation of protections

It is hereby declared that the restrictions and undertakings specified in each of clauses 13.3 to 13.14 inclusive are separate and distinct restrictions and undertakings and if taken separately or together they are adjudged by an arbitral tribunal constituted in accordance with clause 19 to go beyond what is reasonable in all the circumstances for the protection of the Protected Entities and their businesses and for the protection of each of the Protected Entities and their respective businesses but would be adjudged reasonable and valid if part or parts of the wording thereof were deleted, the said restrictions and undertakings shall apply with such words deleted and the invalidity of any such restriction or undertaking shall not affect the validity of the remaining restrictions and undertakings. For this purpose, each Specified Competitor and Restricted Area shall be regarded as severable.

13.16   Notify future employer etc

Any Partner or Outgoing Partner who intends to become an employee of, or partner or member in, a firm, company, limited liability partnership or other organisation or entity competing with any of the Protected Entities shall immediately upon accepting a position with such entity draw attention to the restrictions contained in this clause 13 and provide a copy of this clause 13, together with relevant definitions and particulars of relevant Restricted Areas and Specified Competitors, but no other part of this Agreement.

13.17   Damages not adequate

The Partners agree that the potential damage to the Protected Entities of a breach of clause 13 may be such that it is unquantifiable or that the Outgoing Partner concerned will not be able adequately to compensate the Protected Entities. Accordingly each Partner acknowledges that any of the Protected Entities may seek alternative remedies, including an injunction and/or specific performance and/or any other equitable relief to enforce (whether in respect of any threatened or actual breach) any part of this clause and that no proof of special damages shall be necessary for the enforcement of this clause.

13.18   Payment of damages

Without prejudice to clause 13.17, the Board may decide that in the case of a breach of clause 13 any of the Protected Entities should claim damages suffered by any of the Protected Entities as a result of the breach in question as well as an injunction or that any of the Protected Entities is willing to accept compensation rather than seek an injunction. If either decision is taken, the Outgoing Partner in question shall pay to any of the Protected Entities (for itself and other Protected Entities) as a debt the amount determined under clause 13.19.

13.19   Determination of amount

If the amount referred to in clause 13.18 cannot be agreed, then the dispute concerning such amount shall be determined in accordance with clause 19.

  1. It was common ground that in cl 13.8, the words “Linked Member” should be read as (the defined expression) “Linked Partner”.

  2. It was common ground, also, that cl 13.15 has at least the following effect:

  1. it would be open to the court to order that some only of the preceding restraints be enforced, if it concluded that the others were unreasonable and hence void restraints of trade;

  2. it would be open to the court to vary the restraints by excision; but

  3. it would not be open to the court to vary them by addition.

  1. The other matter to note at this point is the definition of “Confidential Information”, which is contained in cl 1.1. That definition is:

information relating to the business, clients, suppliers or employees of the Partnership that is not in the public domain (other than as a result of a breach of duty by a person).

  1. The definition of Confidential Information in the HSF Global Agreement is more elaborate, and contains an express carve-out for client confidential information that the client consents to be used or made public. Nothing of present significance turns on the difference in wording.

The defendants’ undertakings

  1. The undertakings proffered by the defendants to the court substantially mirror cls 13.3 to 13.6(a),(b) (but excluding (c)), 13.10 and 13.11 of the Partnership Record. If there were differences in wording between what was offered and the corresponding clauses of the Partnership Record (save in respect of cl 13.6 of the latter), no one drew attention to them. However, the undertakings did include their own, although not extensive, dictionary. The definition of “Rendering Services” in the undertakings followed the wording of the definition of the same expression in cl 13.2, but added a new sentence:

However, for the avoidance of doubt “Rendering Services” shall not include the public identification of an Outgoing Partner as a legal practitioner or as a partner of White & Case.

  1. The definition of “Restricted Period” differed significantly. Instead of the words contained in cl 13.2 of the Partnership Record, the undertakings contained the following definition:

in respect of each Outgoing Partner, the period of six months from the Partner’s Retirement Date reduced by any period of suspension.

  1. In my view, the changes to those two definitions could introduce difficulties were the court minded to accept the defendants’ undertakings. The difficulties are, perhaps, more apparent in respect of “Restricted Period”.

  2. The “for the avoidance of doubt” exclusion to the definition of Rendering Services leaves at large the form that the “public identification” might take, and the content of any announcement or advertisement in which that public identification might appear. Whether or not that would be a real source of difficulty is uncertain. It is however better that any uncertainties in the operation of injunctions (or in the performance of undertakings to the court that have equivalent effect) should be pre-empted if at all possible.

  3. As to the changed definition of Restricted Period, there is a live factual issue as to whether any of the defendants had served a “period of suspension” after 1 September 2016. It was not however suggested that any of the defendants had been given a notice of suspension under cl 11.5 of the Partnership Record. Thus, on the definition of Restricted Period in the Partnership Record, any triggering of the suspension provision would be, objectively, clear. The operation of the restraint assessed by reference to the alternative proposed definition would have the potential to lead to arguments of breach. In my view, such arguments should be headed off if at all possible.

Approach to assessing the validity of restraints of trade

  1. The general principles were not in dispute. The common law set its face against covenants in restraint of trade, and held them to be void, as being against public policy. There were exceptions, the burden of proof of which lay upon the covenantee, where the covenant afforded no more protection than was reasonably necessary for the legitimate interests of the covenantee. Whether or not the covenant is reasonable depends on identification of the interests that it is said to protect, and an assessment of the width of the covenant by reference to those interests, bearing in mind always that the assessment of whether the covenant is reasonable must take into account the public interest as well as the private interests of the covenantee. No detailed citation of authority is necessary. It is sufficient to refer, without quotation, to the judgment of Gibbs J in Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd (1973) 133 CLR 288 at 315 – 316.

  2. In New South Wales, the position at common law is affected by the Restraints of Trade Act 1976 (NSW). Section 4(1) provides that “[a] restraint of trade is valid to the extent to which it is not against public policy, whether it is in severable terms or not.” It is unnecessary to reconsider whether, as I suggested in Stacks Taree v Marshall (No 2) [2010] NSWSC 77 at [42], the effect of s 4(1) is to “reverse the common law presumption of invalidity”. No one suggested that this dispute should or would be resolved, at either the interlocutory or the final stage, by application of the burden of proof.

  3. I add that s 4(3) of the Restraints of Trade Act, which empowers the court, on the application of a person subject to restraints of trade, to vary them has no application in the present case. The defendants, the persons subject to the restraints, do not seek relief under s 4(3). It is thus unnecessary to give any attention to the extent of the power that the subsection provides.

  4. Counsel referred to a number of decided cases in the course of their submissions. I shall refer to those decisions, to the extent that it is necessary to resolve the issues that were debated between the parties.

Applications for interlocutory injunctive relief: general principles

  1. The principal matters that a court considering whether to grant interlocutory injunctive relief must consider are:

  1. whether the applicant for relief has shown a prima facie case for the grant of final relief;

  2. whether the balance of convenience, including as an element the adequacy of damages as a remedy for any breach, favours the grant of interlocutory injunctive relief; and

  3. whether there are any discretionary considerations that tend for or against the grant of relief.

  1. A plaintiff seeking to show a prima facie case for the grant of final relief does not have to demonstrate that it is more likely than not that, upon the final hearing, such relief will be granted. As Gummow and Hayne JJ explained in Australian Broadcasting Corporation v O’Neill (2006) 227 CLR 57 at [65], that plaintiff must show a sufficient likelihood of success at trial to justify, in all the circumstances of the case, the preservation, pending the trial, of the existing state of affairs; or as their Honours called it, the “status quo”. It follows, as their Honours said at [71], “that the requisite strength of the probability of ultimate success depends upon the nature of the rights asserted and the practical consequences likely to flow from the interlocutory order sought”.

  2. In short, the assessment of the strength of the plaintiff’s case for final relief must take into account the advantages and disadvantages that will flow from the grant or refusal of interlocutory relief.

  3. In some cases, assessment of where the balance of convenience (or, as May LJ called it in Cayne v Global Natural Resources PLC [1984] 1 All ER 225 at 237, the “balance of the risk of doing an injustice”) lies will require the court to make some assessment, beyond the “prima facie” test, of the strength of the plaintiff’s case. Those cases are ones where, as McClelland J explained in Kolback Securities Ltd v Epoch Mining NL (1987) 8 NSWLR 533 at 535 – 536, the decision on an application for interlocutory relief may have the effect, in practical terms at least, of deciding the fate of the application for final relief.

  4. The Kolback issue is important in the present case. Were I to grant all the relief sought by the plaintiffs, the defendants would have effectively three choices:

  1. accept the position, and wait six months to take up their partnerships with White & Case. This assumes of course that the offers of partnership would remain open.

  2. Alternatively, the defendants could seek leave to appeal. That would involve their confronting the well known limitations on challenging interlocutory discretionary decisions.

  3. The third alternative would be to seek an expedited final hearing.

  1. If (on the hypothesis presently under consideration) the defendants were to choose the second or the third alternative, it is unlikely that they would have a decision in less than perhaps two months (in the case of an interlocutory appeal, assuming that the Court of Appeal could assemble a bench to hear it in the very near future) or three months, in either case at the earliest. It is possible that, on either alternative, the delay would be greater.

  2. I accept of course that there could be still other possibilities, including that for whatever reason (and I do not mean to be disrespectful in putting it this way), the Court of Appeal would grant an early stay of the operation of the interlocutory injunctive relief.

The interests protected by cl 13

  1. Mr Brereton identified three interests that, he submitted, were legitimately able to be protected by those restraints set out in cl 13 of the Partnership Record, and would have been so regarded at the times each of the defendants became bound by these restraints. They were:

  1. goodwill;

  2. confidential information; and

  3. workforce stability.

  1. As to goodwill, Mr Brereton adopted Lord Macnaghten’s description in IRC v Muller & Company’s Margarine Ltd [1901] AC 217 at 223 – 224:

It is the benefit and advantage of the good name, reputation and connexion of a business. It is the attractive force which brings in custom. It is the one thing which distinguishes an old established business from a new business at its first start.

  1. Mr Brereton noted that under the Partnership Record, incoming partners do not pay anything on account of goodwill, and retiring partners are not paid anything in respect of it. Nonetheless, he submitted, access to HSF Australia’s goodwill – its reputation, its client base, and all the other factors that make it a leader in its field – must be regarded as a powerful motivating factor for those wishing to become partners.

  2. As to confidential information, Mr Brereton relied on both Confidential Information of HSF Australia itself (as defined in the Partnership Record) and confidential information of HSF Australia’s clients. He submitted that both were legitimate subjects of protection.

  1. As to workforce stability, Mr Brereton submitted that the plaintiffs had a legitimate interest in minimising the impact of the defendants’ retirements, and in being protected from competition at the hands of the defendants for a reasonable time to enable them to do that.

  2. Mr Walker accepted in principle that each of the three interests identified by Mr Brereton could be the legitimate subject of protection by covenants in restraint of trade.

  3. As to goodwill, Mr Walker submitted that it comprised two elements: reputation, and client connection. He submitted that HSF Australia’s reputation would not be affected, one way or the other, by the retirement of partners. He did accept that client connection was a legitimate subject of protection. However, he submitted, this should be limited to existing or past clients of HSF Australia – in the language of cl 13, to Clients. Even then, Mr Walker submitted, there was no legitimate interest in protecting a possible connection with those who were merely prospective clients except where, as the definition of Client recognises, there had been “material dealings” between any of the defendants and that prospective client.

  4. As to confidential information, Mr Walker submitted that the plaintiffs’ legitimate interest was protected adequately by the non-contentious restraints, and by the professional obligations imposed on the defendants, as legal practitioners, by virtue of their profession. He submitted that the defendants, as experienced legal practitioners, were well accustomed to handling confidential information of clients and respecting its confidence, and could be expected to continue to do so.

  5. As to workforce stability, Mr Walker submitted again that the plaintiffs’ legitimate interest was adequately protected by the non-contentious restraints. He submitted that para (c) of cl 13.6 offered no additional protection to that afforded by paras (a) and (b). He submitted that there was no reason why the defendants should not be able to accept unsolicited applications On the contrary, Mr Walker submitted, it was in the public interest that they should be free to do so.

Submissions more generally

  1. Both Mr Brereton and Mr Walker submitted that the question of assessment of the validity of the cl 13 restraints was to be judged at the time each of the defendants became bound by them. For all of the defendants but the second Ms Draper, that was on 1 October 2012, when the Partnership Record in (substantially at least) its present form took effect. In the case of Ms Draper, that was when she became a partner of HSF Australia in May 2015. Despite their professed acceptance of this principle – which is clear on the authorities – both Counsel from time to time strayed from it in their submissions.

  2. Having mentioned Ms Draper, it is convenient to note that from her admission to the partnership in May 2015 until yesterday, she was a Partner up to the Review Point. Accordingly, cls 13.7 and 13.9 do not apply to her.

  3. In broad outline, Mr Walker accepted that the restrictions contained in cls 13.3 to 13.6(a),(b) were sufficiently linked to protection of the legitimate interests of HSF Australia, so that they could not be regarded as contrary to public policy and thus void. However, as to cls 13.6(c) and 13.7 to 13.9, he submitted that they went further than was necessary to protect those legitimate interests. That was so, Mr Walker submitted, because each of those interests was adequately protected by a combination of the preceding subclauses, and (in the case of confidential information) by both the obligations binding each of the defendants as lawyers and the provisions of cl 13.11.

  4. In those circumstances, Mr Walker submitted, cls 13.6(c) and 13.7 to 13.9 could only be directed at seeking to prevent competition for its own sake. That, he submitted, was against the public interest.

  5. Mr Brereton submitted that the disputed clauses did have a legitimate purpose, and that they were not merely directed at suppressing competition. He relied on the fact that part of the defendants’ function as partners had been to attract new business to the firm. That involved necessarily the establishment of personal relationships with both existing and prospective clients. Mr Brereton relied on what was said by Latham CJ in Lindner v Murdoch’s Garage (1950) 83 CLR 628 at 633 – 634:

… Where an employee has access to trade secrets or other confidential information he may be restrained by agreement from communicating those secrets or such information to other persons, and particularly to competitors in trade with his employer. Again, an employee who is brought into personal contact with the customers of his employer may by agreement effectively bind himself to abstain after his term of service has been completed from soliciting the customers of his former employer. In these cases the covenant in restraint of trade is not a covenant against mere competition but is a covenant directed to securing a reasonable protection of the business interest of the employer, and in the circumstances is not unjust to the employee. The interest which can validly be protected is the trade connection, the goodwill of the business of the employer.

  1. Mr Brereton relied also on what his Honour said in the same case at 637:

… During the service he is in constant contact with the master’s customers, and cannot fail to learn their names and addresses, their likes and dislikes, and something of their financial credit. Such knowledge can be used with effect, after the determination of the service, to induce such customers to transfer their custom to a new employer. Certain conduct of this kind will be restrained, as being in breach of implied terms in the contract of service:

…

Other conduct of this kind, though injurious to the late employer, will not be restrained in the absence of express agreement. Such agreement need not take the form of a covenant against solicitation. Such a covenant is difficult to enforce; it is difficult to show breach and difficult to frame an injunction. The master is entitled to protect himself by a covenant against competition, provided that is it not wider than is reasonably necessary to safeguard his proprietary interest against unfair use by the former servant of information gained during the service: …

  1. The Chief Justice dissented on the facts of that case, but his statement of the principles is, nevertheless, of persuasive force (noting that Webb J at 647 agreed with it).

  2. In this case, Mr Brereton submitted, if restraints of the kinds set out in the disputed clauses were not imposed, there would be a real risk of witting or unwitting use of connection and confidential information. That could happen, Mr Brereton submitted, because the defendants would come under considerable pressure from White & Case to do what they could to promote the business of the new partnership in this country.

  3. Mr Brereton relied also on what Brereton J said in Koops Martin v Deane Reeves [2006] NSWSC 449 at [53]:

The validity of a restraint is judged at the time at which the contract is made, and having regard to what it entitled or requires the parties to do as distinct from what they intend to do or have actually done [Nordenfelt, 574; Commercial Plastic Limited v Vincent [1964] 3 WLR 820, 829; Heydon, pp 37-40; Galbally, [117]; Lindner v Murdochs Garage; Curro v Beyond Productions Pty Ltd (1993) 30 NSWLR 337, 344; Woolworths Limited v Olsen, 372 [40]]. As the parties have to turn their minds as to what is reasonable at the time when the restraint is created, some allowance must be made for potential developments in the role of the employee and the nature of the business for which he or she might be responsible in the future. Reasonableness does not require precise concordance between the restraint and what might ultimately be seen as the employer’s legitimate interest; it is accepted that a reasonable covenant might on the one hand not totally protect the employer in one respect, and on the other go somewhat further than is necessary for legitimate protection, without ceasing to be reasonable [Coote v Sproule, 580-581].

  1. I should add that although Mr Walker did not dispute that the existence of a stable trained workforce could be a legitimate interest of HSF Australia, the proposition that it is is supported by the decision of Brereton J in Cactus Imaging Pty Ltd v Peters (2006) 71 NSWLR 9 at [55]. It is not necessary to set out that paragraph.

  2. The submissions of Counsel were far more detailed, and more subtle, than this brief summary. However, what I have said is sufficient to provide an outline of the extent of, and some indication of the broad issues comprised in, the dispute.

Decision

Preface

  1. I start by acknowledging that the validity of the restraints is not to be considered in isolation. They form part of a coherent scheme of protection. It would be erroneous to extract each clause from its context, assess it in isolation by reference to the suggested interests, and then come to a concluded view on its validity, without returning to the overall scheme of cl 13, and its place and function in the Partnership Record.

  2. The next point to make is that, as Edelman J said in Emeco International Pty Ltd v O’Shea (No 2) (2012) 225 IR 423 at [4], “[t]he balancing exercise involved in restraint of trade cases is one of evaluative judgment having regard to the terms of the covenant and the facts of the case”.

  3. Finally (by way of preface), this is an interlocutory application. I cannot decide disputed questions of fact. And in circumstances where the application was brought on urgently for hearing, and requires immediate decision, I do not propose to decide disputed questions of law.

Structure of cl 13

  1. I start by making some observations about the structure of cl 13. The first two subclauses are preliminary: dealing with the application of the restraints, and matters of interpretation.

  2. The next group of subclauses, cls 13.3 to 13.5, comprises restraints directed at the post-retirement relationship between Outgoing Partners and Clients. The definition of the word “Client” requires not only that the entity so described should have been a past or prospective client at some relevant time, but also that the Outgoing Partner should have had material dealings with it in the course of performing his or her duties for HSF Australia or any other Protected Entity.

  3. There is thus a real connection between the interest sought to be protected – client connection – and the form of the restraint, in each of those subclauses. That no doubt is why the defendants have offered undertakings that, in substance at least (and leaving aside definitional quibbles), effectively replicate those clauses.

Clause 13.6

  1. Clause 13.6 is clearly directed to another legitimate interest: workforce stability. Again, the restraints in the first two paragraphs deal with a situation where solicitation or enticement either exists (para(a)), or might reasonably be thought to have preceded the offer (para (b)). Again, those two paragraphs can be seen to protect legitimate interests, and again, no doubt, that is why the defendants offered equivalent undertakings.

  2. The third paragraph is a little more problematic. If implemented, it would prevent the defendants from accepting even unsolicited offers to work for them, made by Members or Qualified Lawyers, as defined. Mr Walker submitted that this was against the public interest, because it prevented such persons from pursuing their profession to what they saw was their best advantage. Mr Walker submitted, further, that this could partially sterilise their services, and deprive the public of access to them. I am not sure that this last point is correct; White & Case is not the only employer of FREP (or other) practitioners in either Sydney or Melbourne.

  3. It seems to me that one justification of cl 13.6(c) is that it would prevent effect being given to what might be called “nod and wink” arrangements where, without provable solicitation or enticement, or a provable offer, there is nonetheless some understanding between the defendants or any of them and the Member or Qualified Lawyer referred to in para (c). I am not for a minute suggesting that there is any reason to think that the defendants would engage or have engaged in such behaviour. The proposition is, rather, that at the time the restraints became binding on the defendants, it was at least foreseeable that there might be such nod and wink arrangements, and a corresponding need to render them ineffective.

  4. On that analysis, cl 13.6 would operate to deprive the defendants of the benefit of direct solicitation or enticement, direct offers, and arrangements that, whilst not falling under either of the preceding heads, nonetheless could be said to have been foreseeable at the relevant times (I repeat, the times when the restraints became binding on each of the defendants).

  5. There is a further arguable application of the plaintiffs’ legitimate interest in protecting and promoting stability in their workforce. It seems to me that it could well have been foreseeable, at the relevant times, that the arrival in town of a new firm, the Australian emanation of a leading international law practice competing with HSF Australia in at least some of the latter’s areas of practice, could be attractive to ambitious, particularly younger (pre-partner) lawyers. That is to say, it seems to me that it could have been foreseeable, at the relevant times, that the arrival of a new kid on the block could be seen by such lawyers as an opportunity to advance their careers perhaps more rapidly than they could do at HSF Australia.

  6. In those circumstances, I think, it could well have been foreseeable, at the relevant times, that the event of a group of partners leaving and setting up as the local branch of a leading international law firm would be capable of interesting young lawyers at HSF Australia in moving, and that this would be so even in the absence of any enticement, offer or nod and wink arrangement. That, in my view, is another justification for the restraint set out in cl 13.6(c).

  7. There is one more thing to consider. That is that much of what I have just said would become irrelevant if cls 13.7 to 13.9 were to be enforced. One consequence, flowing in particular from cl 13.9, would be that during the period of restraint, White & Case would not have the same attractive force for any restless young lawyers at HSF Australia. But if cl 13.9 is not to be enforced, then cl 13.6(c) could have real work to do (more accurately, could have been seen, at the relevant times, to have real work to do).

  8. On balance, this does seem to me to be a case of the kind to which Brereton J referred in Koops Martin at [53], where some over-reaching – some drafting that may go “somewhat further than is necessary for legitimate protection” – does not necessarily demonstrate unreasonableness.

  9. At the very least, the plaintiffs’ argument cannot be said to be weak, to the point where the balancing exercise that is required dictates that the cl 13.6(c) restraint should not be enforced pending final hearing.

  10. There are several more points to make. They are relevant not only to this clause but to all the disputed clauses.

  11. First, the parties to the agreement constituted or evidenced by the Partnership Record must be regarded as commercially and legally sophisticated. They must be regarded as individuals who were each well capable of assessing their own interests, and in analysing the legal structure whereby their respective rights, interests and obligations were to be governed. The court should be very slow indeed to substitute its own commercial judgment for theirs. As Lord Reid put it in Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd [1966] AC 269 at 300:

Where two experienced traders are bargaining on equal terms and one has agreed to a restraint for reasons which seem good to him the court is in grave danger of stultifying itself if it says that it knows that trader’s interest better than he does himself. But there may well be cases where, although the party to be restrained has deliberately accepted the main terms of the contract, he has been at a disadvantage as regards other terms: for example where a set of conditions has been incorporated which has not been the subject of negotiation – there the court may have greater freedom to hold them unreasonable.

  1. The Court of Appeal made a similar point in Woolworths Limited v Olson [2004] NSWCA 372 at [39]. It is not necessary to set out the paragraph.

  2. The next point, emerging from the decision in Olson at [67], is that a restraint against competition may be justified where it is reasonable to protect, for example, the covenantee’s interest in its confidential information. A reasonable restraint on competition generally is easier to enforce than a restraint directed specifically and solely at misuse of confidential information, and renders impotent any temptation that otherwise might exist to breach an obligation of confidence.

  3. Finally, in this context, there is the important consideration that the covenants are mutual. Each partner undertakes to be bound by them at the time he or she becomes a partner. Each partner takes the benefit of them at the time each other partner accedes to them. As Mason J said in Geraghty v Minter (1979) 142 CLR 177 at 198:

The fact that the covenant is entered into by each of the partners and may become binding on any of them, depending upon the events which happen, is a factor which is to be taken into account in assessing whether it is reasonable between the parties.

Clauses 13.7 to 13.9

  1. As I have noted already, the first and last of those do not apply to Ms Draper. Further, in construing cl 13.8 and assessing its operation, I proceed on the common basis that “Linked Member” should be read as “Linked Partner”.

  2. Again, Mr Walker submitted, given the width of the protections offered by the non-disputed clauses, cls 13.7 to 13.9 could only be directed to restraining competition. That, he submitted, was invalid unless there were some legitimate purpose to be served. And in view of the protections offered by the earlier clauses, Mr Walker submitted that there could be no such purpose.

  3. Mr Brereton submitted that the clauses in question were aimed, individually and together, at severing the connection between the defendants and the Clients for whom they had worked whilst partners of HSF Australia. He submitted that the clauses served a legitimate purpose, because they enabled HSF Australia to appoint new partners in the FREP practice group, and employ new lawyers for that practice group, and give those partners and lawyers an adequate opportunity to cement their relationships with Clients before the defendants could compete. Given that the defendants are in any event to be restrained from working for those Clients, and for each other’s Clients, it is a little difficult to understand this argument.

  4. As will be apparent from what I have just said, I think that there is much force in this aspect of Mr Walker’s submissions. When one assesses the overall scheme of protection set out in cl 13 of the Partnership Record, it is strongly arguable that the identified legitimate interests of HSF Australia are sufficiently protected by cls 13.3 to 13.6, read (as is common ground should be done) in the light of the extensive definitions contained in cl 13.2. Those clauses constitute a carefully drafted, wide-reaching scheme of protection for the identified interests. They are capable of functioning perfectly well without the additional restrictions imposed by cls 13.7 to 13.9.

  5. In those circumstances, there is, so it seems to me as a matter of construction, a powerful argument that cls 13.7 to 13.9 go beyond what is required for the legitimate protection of the identified interests of HSF Australia. If clauses 13.7 to 13.9 add nothing of substance to the scheme of protection created by the earlier clauses, the inevitable inference is that their real purpose is to suppress competition.

  1. As I have noted, there are decisions which indicate that some suppression of competition, for a limited period, may be justifiable where it is the only way of protecting the legitimate interests of the covenantee. But this case is distinguishable, both on its facts and by reference to the overall terms of the restraints, from those decisions: decisions such as Lindner and Koops Martin.

  2. If that analysis were to be sustained on a final hearing, the consequence would be that the clauses in question would be held to be void, as being covenants directed merely at suppressing competition, and not reasonably necessary for the protection of the identified interests.

  3. As against that conclusion, there is the powerful consideration that the defendants, the parties best placed to assess their own interests, voluntarily agreed to the restraints, in consideration of all the other partners doing so, and in the expectation of reaping the rewards that, undoubtedly, they perceived were likely to flow from admission as partners. Why should the court substitute its judgment, looking back, for theirs, looking forward? The question is not easy to answer.

  4. The answer for which the defendants contend suggests that the court, which of necessity has a relatively superficial knowledge of the affairs of HSF Australia at the relevant times (and I say this despite the mass of materials that was put before the court on the interlocutory application) is in a better position to make that evaluative decision than were the defendants. If I may say so, that suggestion is difficult to sustain, particularly in the context of an application for interlocutory injunctive relief.

  5. Mr Walker referred to statements made by very senior representatives of HSF Global (one of whom at least was a partner of HSF Australia), to the effect that HSF Australia had ample reserves of talent to draw upon, and could readily replace the departing partners. Those persons sought to assure the marketplace that HSF Australia’s ability to provide a full and efficient service to its clients would not suffer. Mr Walker relied on the fact that neither of the individuals in question had given evidence to suggest that what they said was no more than mere puffery.

  6. The point is not without substance. However, faced with what appears and must have been seen by clients and potential clients to be a concerted departure, it was necessary for HSF Australia to take immediate steps to protect its reputation and its client base. Whilst I do not for a minute suggest that the individuals in question intended to mislead, the statements that they made were very much of the kind that one would expect to be made in those circumstances. They were part of a range of activities undertaken by HSF Australia to cope with the departure of the eight defendants, and the subsequent departure of 34 lawyers, and other, non-legal, staff.

  7. I recognise, that this analysis (mine, as well as Mr Walker’s) involves taking account of what has happened, whereas the evaluative judgment is to be made at the time that each of the partners acceded to the restraints. But having said that, it could not have been unforeseeable, at those times, that a number of partners, from the particular (or any other) practice group might leave simultaneously, for the purpose of setting up shop elsewhere.

  8. In summary, the arguments in favour of the proposition that cls 13.7 to 13.9 go further than necessary, and thus are void as being unreasonable restraints of trade, have very considerable force. The countervailing proposition, that the defendants, being the best judges of their own interests, did not so regard them is also forceful. In those circumstances, the validity (or invalidity) of the clauses is a difficult matter to assess. Whilst I am not prepared to say that they are clearly void as being in restraint of trade, I do think that the plaintiffs’ case, on those clauses, faces serious difficulty.

Clauses 13.10 and 13.11

  1. Mr Brereton said that the plaintiffs did not seek relief in respect of these clauses. The defendants’ undertakings, however, did offer undertakings equivalent to the restraints that those clauses would impose.

  2. I do not know if the plaintiffs’ position was based on the defendants’ expressed willingness to give those undertakings. If that were the case, then proceeding as I will do by way of orders rather than accepting undertakings may expose the plaintiffs to at least theoretical risk. If necessary (and if the plaintiffs request) I would consider accepting those of the defendants’ undertakings that are referable to cls 13.10 and 13.11.

  3. If there were some other reason why the plaintiffs did not press for orders in terms of those clauses, then this matter can be left where it is.

Balance of convenience

The parties’ submissions

  1. Mr Brereton submitted that this was manifestly a case where damages would not be an adequate remedy for any breach that might be proved.

  2. Mr Walker did not accept that proposition. He noted that the defendants, as lawyers, were required for legal, practical and commercial reasons to keep detailed records of all retainers. Those records would of course enable identification of the client, of the terms of the retainer, of the work to be done pursuant to it, and of the work actually done. Those records would also reveal many other matters relevant to any potential claim for damages. In those circumstances, Mr Walker submitted, it would be easy for the plaintiffs to ascertain whether there were any breach of the enforceable covenants, and to prove damages.

  3. Mr Brereton submitted that enforcement of the restraints would not prevent the defendants from earning a living. It would stop them, at the most, from earning that living as clearly, they propose to do over the six months’ lifetime of the restraints. That submission is unrealistic. It assumes that the defendants could obtain some sort of temporary or locum work, of a kind for which their qualifications and experience suited them, over that time; or that they should abandon their fields of expertise and pursue instead the routine practice of a suburban solicitor; or turn to some other field of legal endeavour.

  4. Mr Brereton submitted, further, that the defendants had been very well remunerated whilst they were partners of HSF Australia. He pointed to evidence showing the large amounts that had been paid to them (before tax) in the eight months from 1 May to 31 December 2016. Presumably, they will have been similarly (although pro rata) remunerated for the months of January and February 2017.

  5. Mr Walker submitted that, notwithstanding those payments, the injunctions would have serious financial consequences for the defendants, including by limiting their ability to support their families. He pointed to evidence that some defendants were the sole providers for their households, and that two of them had children with special needs or medical conditions. One of those in the latter category was the one whose receipts from May to December 2016 were, at least in relative terms, the most modest.

  6. Further, Mr Walker submitted, enforcement of the restraints would prevent the defendants from developing their expertise and careers for the duration of the restraints, in various ways.

  7. Mr Walker submitted that the grant of interlocutory injunctive relief would effectively determine the matter on a final basis, and that it would have the consequence, for the duration of the restraints, of depriving the public of the benefit of the defendants’ services. He relied on what I said in Stacks (No 2) at [53]:

I accept that the decision – in particular, the speech of Lord Birkenhead – identifies the principles and the relevant considerations of fact. I accept, too, their Lordships’ reasoning process. But I have to say that I have some doubt as to whether the case would be decided in the same way today – at least, in this country. Competition law has moved a long way in the 90 -odd years since the dispute between Messrs Dewes and Fitch came before the courts. It might now be thought appropriate to give greater recognition to the public interest in ensuring competition, and hence efficiency, in the market for the provision of legal services.

  1. One matter that Mr Walker submitted was significant is that the plaintiffs have entered into consultancy arrangements with six of the eight defendants, to enable them to work on “Critical Matters”. That occurred when clients of HSF Australia expressed concern that the departure of the defendants would mean that their matters would not receive adequate attention. To allay those concerns, HSF Australia engaged those six defendants as consultants, to work as required on those matters. HSF Australia agreed, further, that if those defendants ultimately joined White & Case, that work could be subcontracted to White & Case. Mr Walker submitted that this demonstrated that HSF Australia was satisfied that those defendants would observe their obligations under the Partnership Record, to the extent that they were enforceable. It was thus relevant to risk and so, he submitted, to the balance of convenience.

Decision

  1. At the outset, it is necessary to bear in mind that this is not a case where, if the plaintiffs’ interlocutory application fails, they will be left without remedy. The dispute is limited to cls 13.7 to 13.9 (I leave aside, having resolved them in favour of the plaintiffs, the definitional quibbles and the issue as to cl 13.6(c)). The balance of convenience must be assessed:

  1. bearing steadily in mind the substantial protection to the plaintiffs’ legitimate interests that is offered by cls 13.3 to 13.6; and

  2. by asking whether, in those circumstances, the potential injury to the plaintiffs from refusing orders enforcing cls 13.7 to 13.9 would outweigh the potential injury to the defendants if those clauses were enforced.

  1. Further, the assessment of balance of convenience considerations must take into account my conclusion that the plaintiffs’ case as to the validity of the disputed clauses is, at best, finely balanced. This is not a case, of the kind referred to by McClelland J in Kolback at 536, where the strength of the plaintiffs’ case is so manifest that, in itself, it is a powerful balance of convenience consideration favouring the grant of relief.

  2. I do not agree that this is clearly a case where damages are manifestly adequate as a remedy. I do accept that if HSF Australia becomes aware of a breach (for example, of clauses 13.4 or 13.5), it would be able, no doubt after a struggle, to obtain records of the defendants to prove the breach, and to assist in quantifying damages. However, to have any prospect of getting hold of those records, HSF Australia would need admissible evidence of breach. That would require, presumably, evidence from someone within White & Case, or evidence from a Client.

  3. It might be thought to be unlikely that a whistleblower in White & Case would be prepared not only to inform HSF Australia of the fact of breach but also to give admissible evidence in open court of that. And it might be thought equally unlikely (and extremely undesirable from a practical perspective) that a Client would be asked to become involved in litigation between HSF Australia and the defendants.

  4. Nor is it obvious that damages would be an adequate remedy for any breach of cl 13.3 or cl 13.6(a),(b). In the former case, it would be necessary to prove the value of the opportunity that, by hypothesis, was lost as a result of the breach. In the latter case, it would be necessary to prove the costs (both direct and other) of dealing with the consequences of the solicitation, enticement or offer. I do not agree that those are matters that are susceptible of easy and precise (or even approximate) assessment in money.

  5. I accept that enforcement of the restraints would be likely to have adverse financial consequences for the defendants. I accept that in some cases at least, those consequences may be significant. But those consequences must have been apparent to the defendants – including those who are sole providers, or who have children with special needs or medical conditions – when they made the decision to retire, for the purpose of taking up partnership in White & Case. It could hardly be thought that they assumed, rationally, that HSF Australia would not act to protect its interests by seeking to enforce the restraints. That is so, particularly, when one takes into account the circumstances of the departure: eight partners leaving, virtually at the same time as each other, to join a competitor firm.

  6. The defendants must be taken to have decided to entertain the risk of enforcement. What they are now seeking to say is that they should not be held to the consequences of their decision. I have some difficulty in seeing why the court should relieve them of the consequences of what must have been a careful decision. I repeat that the defendants were all well and truly able both to assess the commercial implications of their decision and to understand its legal consequences.

  7. It is not immediately apparent that a decision to grant the relief sought would be in effect a practical determination of the issues, without there being a full final hearing. I refer to what I have said earlier in that regard. I accept of course that it would have that effect, probably for two to three months at least, unless the Court of Appeal could be persuaded to set aside or stay the injunctions before a final hearing of any application for leave to appeal (and appeal, if leave be granted).

  8. I do accept that to grant the interlocutory relief sought would have the effect of preventing the defendants from working in their chosen area of expertise. That would have at least two consequences. One is that the defendants would be taken out of the marketplace, so that, when the restraints expire, it may take them some time to re-establish themselves. That, again, is something that they must have foreseen when they made their individual decisions to leave.

  9. Another consequence would be that, for the duration of the restraints, their specialist services would likely be denied to the market. However, this case is not in any way factually comparable to Stacks (No 2). There is no evidence that, if the defendants were to be prevented from operating for six months in their chosen field of expertise (and I do not accept that this would necessarily be the practical effect of the injunctions), there would remain in the marketplace only an insufficient pool of talent available to service the needs of clients during the period of the restraint.

  10. I come back to the point where I started this analysis. The refusal of orders enforcing the disputed clauses would not leave the plaintiffs without protection. They will have the benefit of the detailed and extensive protections offered by cls 13.3 to 13.6.

  11. I take into account, also, that it is very difficult to see what the disputed clauses add to the strengths of that protection, other than by suppressing competition. To put it another way, it is very difficult to see how a refusal to enforce the disputed clauses could operate to the disadvantage of the plaintiffs in any significant way, in the protection of their identified interests.

  12. On that analysis, the harm to the plaintiffs in refusing to enforce the disputed clauses is unlikely to be of any significance. On the other hand, the harm to the defendants will be significant; and this is so even though, as I have said, they must be taken to have foreseen and decided to accept the risk of that when they made their decision to retire and to join White & Case.

  13. In my view, the balance of convenience considerations do not favour the enforcement of the disputed clauses. On the contrary, bearing in mind the apparent lack of utility in enforcement, they tell strongly against it.

Other discretionary considerations

  1. The parties did not refer to any separate discretionary considerations which would bear on the question, whether to grant or withhold enforcement of the disputed clauses.

Conclusion and orders

  1. The plaintiffs of course offered the usual undertaking as to damages. I can accept that the damages might be substantial if it proves that the interlocutory injunctions should not have been granted. Nonetheless, for perhaps obvious reasons, the defendants did not submit that the plaintiffs were not good for the amount of damages that might be sustained.

  2. The plaintiffs have made good their claim to part only of the interlocutory injunctive relief sought by their further amended notice of motion filed in court on 28 February 2017. Mr Walker did not submit that, if I were to come to the conclusion I have, nonetheless some other orders should be made. Accordingly, I will make them, to the extent indicated. I repeat that if cls 13.10 and 13.11 require attention, I will deal with them.

  3. That leaves the question of costs. My present view is that costs should be reserved, either to abide or to be decided after a final decision of the disputes between the parties in this court. I put the matter that way because there may well be, as well, an arbitration of the kind contemplated by the Partnership Record dealing with other matters in dispute between the parties. I do not see how an award in that arbitration, if it proceeds, would have any bearing on the question of costs in this court.

  4. The orders that I am about to make assume that the plaintiffs will move for a final hearing as swiftly as possible, and will do whatever they can reasonably do to achieve that. However, should the defendants feel that the plaintiffs are dragging the chain, they will be able to avail themselves of the liberty to apply that I shall reserve. In the meantime, I will place the matter in the Commercial List for directions tomorrow, so that the parties can commence the process of moving towards a final hearing in the near future.

  5. I make the following orders:

  1. note that the plaintiffs by Senior Counsel give to the court the usual undertaking as to damages.

  2. Orders in accordance with paragraphs 1 and 2 (a) to (d) of the further amended notice of motion filed in court on 28 February 2017.

  3. Reserve costs.

  4. Further amended notice of motion otherwise dismissed.

  5. List matter for directions in the Commercial List on 3 March 2017.

  6. Reserve liberty to apply on three days’ notice, or on such shorter notice as the court in all the circumstances may allow.

  7. Direct that the exhibits on the interlocutory application be returned.

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Amendments

07 March 2017 - Paragraph [59] Murdock's to Murdoch's


Paragraph [64] Cactus Imagining to Cactus Imaging

Decision last updated: 07 March 2017

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Cases Cited

12

Statutory Material Cited

1

Amoco Australia Pty Ltd v Rocca Bros Motor engineering Co Pty Ltd [1973] HCA 40
Amoco Australia Pty Ltd v Rocca Bros Motor engineering Co Pty Ltd [1973] HCA 40
Stacks Taree v Marshall (No 2) [2010] NSWSC 77